Santander is building a consortium of global custodians and institutional investors to use an emerging platform using distributed-ledger technology provided by vendor Broadridge, to automate proxy voting at corporate shareholder meetings.
Wayne Cowan, Madrid-based vice president for corporate trust services at Santander’s corporate and investment bank, says the goal is to roll this out for large clients.
But first, Santander has undergone two proofs of concept around its own annual general meetings.
Before the platform can go into deployment, Cowan says the bank needs to attract all the market players, notably the global custodians.
J.P. Morgan and Northern Trust participated in the firm’s second PoC, which saw it run the blockchain solution in parallel with traditional processes around proxy votes.
“When we ran it in parallel, we found the blockchain was accurate,” he told DigFin.“Participating entities [global custodians] could see their information all at the same time, and validate it at the same time.”
Reinventing proxy voting
Patricia Rosch, president for investor communication solutions, international at Broadridge Financial Solutions in Toronto, says Santander contacted the vendor as their proxy service provider in 2016 to look at how DLT could reinvent the process.
Proxy votes represent how institutional investors represent their interests as shareholders of listed companies. The process is fraught with paper-based errors and costs.
Issuers (companies or their agents, a corporate or investment bank such as a Santander) produce an agenda for shareholder meetings, and disseminate that through onshore custodian banks (which in turn may need to pass it through a global custodian partner). The custodians in turn pass it to a corporate trust service vendor such as Broadridge, which passes it on to investors, who vote, and then the vendor has to make sure all the votes are collected and verified.
The process takes days if not weeks, and involves a cumbersome reconciliation process, to make sure all the votes tally.
Rosch says DLT addresses three pain points: it provides a single meeting agenda shared by all; it reconciles entitlements (working out which shareholders can vote) and the votes themselves; and it collates and confirms the votes.
“With distributed ledgers, the issuer writes the agenda on the blockchain and that creates a single source of truth,” she said. This saves time and paperwork, and should give investors more time to review and research the proposals being voted on, as well as cast their vote. The issuer can also see in real time aggregated vote totals and whether quorums are reached.
New markets, new players
Cowan says Santander is working to attract more participants, with one eye on incoming regulation. In 2019, the European Union will activate its European Shareholder Rights Directive, which will impose new requirements on the proxy voting process.
(Santander’s other blockchain-related initatives include being a member of the Utility Settlement Coin; a member of we.trade, a European initiative for trade finance; and retail foreign-exchange payments.)
Rosch says Broadridge’s goal for now is to expand this among participants and enter new geographies: she says Broadridge is working with Investor Communications Japan, a joint venture with the Tokyo Stock Exchange, on a pilot for the Japanese market.
Broadridge isn’t charging fees for this service, and wants to generate a critical mass of users before it comes up with a commercial model, she said.
Santander and Broadridge argue custodians and investors should benefit from a more secure, automated and streamlined process, even if it means custodians’ roles are reduced (particularly sub-custodians, which collate the information for their global custodian counterparties).
DLT, by making the voting process more transparent (among permissioned parties), should boost investors’ confidence in it.
The Santander pilots have used decentralized apps built on top of Enterprise Enterprise Alliance open-source technology (Santander is a founding member of EEA).
But Broadridge is conducting similar exercises on Hyperledger, a rival open-source environment: Rosch says the company will consider working with any emerging technology, and that it’s too early to know what blockchains will become global standards for proxy voting.